Don't shut door on cheap drugs

One industry that, arguably, did not feel the effects of the global slowdown, or inflationary pressures, was pharmaceuticals. Several forecasts and studies have projected a robust growth for the sector.

A string of activity in the M&A sphere has taken the valuation of Indian businesses to dizzying heights, compelling the Government to shift the FDI in the industry from automatic to approval route.

Indian companies have become attractive on account of their strong growth prospects. They are in one of the top ten global markets, in a country with product patent regime, and in a climate that affords higher profitability in the generics business.

GROWTH DRIVERS

A recent study by Yes Bank has put industry growth at 20 per cent year-on-year, and the size at $17 billion (2007-08). For the same period, exports appear to have grown at about 27 per cent CAGR, ($8.6 billion). Projecting a rosy picture, the study estimates the future growth rate at 14.2 per cent CAGR, reaching $50 billion by 2015; the export and the domestic market are expected to grow at 16.2 per cent and 12.5 per cent CAGR, respectively.

The growth drivers have been the abundant technical expertise available, significant cost advantages, increased demand, growth in income levels, growth in generics, several drugs going off-patent, and global reforms favouring generic drugs. A mention also must be made of process innovation, regulatory skill set, capital efficiency and suitability for clinical trials, and health care insurance.

The study indicates that the domestic formulations industry which grew at 14 per cent — higher than international growth rate — to reach $ 8.4 billion (2007) is expected to reach $21.5 billion (2015).

Formulation exports have followed suit at a growth rate (23 per cent CAGR) at $4 billion (2007-08) and are likely to touch $13 billion (2015). This growth has been possible on account of increase in India's share in ANDA filings (23 per cent in 2007 from 6 per cent in 2002); and on account of growth in the global generics market (expected at $150 billion by 2015).

The other opportunities are higher penetration into Japanese markets and growth from European markets.

The active pharmaceuticals ingredients (API) segment exhibited a growth of 11 per cent ($90 billion in 2007) and Indian API exports at $4.2 billion (2007) are expected to touch $12.5 billion by 2015.

Problem areas

The growth curve is, however, laced with knots. The proposed drug price controls and reduced margins in generic business, are only a few. Authorised generics are expected to grow in volumes, partially nullifying Para IV filing benefits. Regulatory restrictions on launch of post-1995 innovations is another factor inhibiting growth.

A recent study by Deutsche Bank projects a less rosy picture for 2012. Delays in ANDA approvals, increasing compliance risks, prolonged litigations, and curtailment of first-to-file opportunities and their conversion into shared opportunities have acted as a dampener on opportunities. However, timely Governmental intervention in a few critical areas would help the industry.

Policy possibilities

India is slowly emerging as a cost-effective generics hub. While recognising and appreciating patent protection laws and the international treaties that the Government has signed, the Government should permit marketing of generics, albeit in a restricted way, so that the patients can benefit from cheaper costs.

One way of doing this is to compel patent owners to licence generic producers on payment of reasonable royalties. This would effectively eliminate the risk of patent regulations and would provide fourth-generation drugs at a cheaper price.

Under-developed and Third World countries, prone to life-threatening diseases, suffer from lack of technical talent and manufacturing capabilities.

These countries suffer from non-availability or lack of appropriate medicines. Indian companies should be granted compulsory licence from the innovator to manufacture and supply generics to these countries, on payment of a reasonable royalty. Income accruing on such sales should be taxed at a lower rate than the normal income.

India is also emerging as a forerunner in the matter of drug discovery and drug delivery systems. Original research demands enormous spending. Companies with talented knowledge and technical pool need to be encouraged by way of grants or interest-free loans.

The R&D funding earmarked for industry needs to be significantly enhanced. A more flexible approach towards amortisation of research expenses and a more suitable and enhanced weighted deduction would be helpful.

Expenses incurred on obtaining regulatory approvals (such as US FDA etc.), ANDA filings, and for compliance with international standards etc. should also be made eligible for weighted deduction.

The existing list of life-saving drugs should be expanded and imports of raw materials and certain specified machinery and equipment for the manufacture of these drugs should be exempted from Customs duty.

Raw materials procured domestically for these products as well as finished dosage formulations of life-savings drugs should be totally exempt from excise duty. The existing excise free zones should be retained, if not expanded, and the time-limits extended.

Indian skills, capabilities and manufacturing facilities should be made available for international markets. Contract manufacturing of goods from international players should be encouraged by removing all legal hurdles – such as withholding taxes, service tax where applicable, exemption from excise duties in third party contracts, and relief from selected transfer pricing issues.

Income from such manufacturing activities should be taxed differently (at a lower rate) than the normal income.

Indian pharmaceutical industry must be allowed to live. While it is rightly said that “those who die, must die”, it is equally important that “those who live, must live”.

(The author is Director and Chief Financial Officer, Natco Pharma Ltd. Views expressed are personal.)

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